Look at jobs, confidence for investing hints

According to Wall Street folklore, investors can expect results for September to turn out like the first trading day of the month.

It's not clear if that will happen this time.

But if you'd like it to be true you had better hope it applies only to the first trading day and not the second.

Tuesday -- the first trading session of the month -- was a pleasant day as the Dow Jones industrial average climbed just over 91 points and investors held on to the courage they mustered just before Labor Day, when they began imagining the Federal Reserve would soon wave a magic wand and sprinkle the economy with the life-giving power of lower interest rates.

But by Wednesday the old fears that sent the Dow down about 5 percent from July 19 to the end of August returned. The Dow dropped roughly 1 percent, or more than 143 points, as the housing recession turned uglier and the outlook for job growth weakened. On Friday, the Dow fell nearly 250 points on a weak employment report.

Investors are flopping around in reaction to each day's economic reports, sending the market up one day, down the next.

At the root is fear -- fear that a credit crunch will make it difficult for businesses and consumers to borrow the money needed to keep the economy growing, and fear that the pressure of unaffordable monthly mortgage payments and dropping home prices will strip consumers of their buying power.

"There is a steady escalation of problems," said economist Brian Bethune of Global Insight Inc. "The train is rumbling down the tracks, and it is getting louder and louder."

The unease, he said, is being fed by the fact that no one knows just how badly the housing mess has infected the financial system. But the recent freeze-up in the $2.2 trillion commercial paper market gives a hint of what can go wrong. Businesses that need to borrow money by selling commercial paper to investors could not access about $244 billion over a recent three-week period, Bethune said.

With financial institutions throughout the world exposed either directly or indirectly to bum mortgage-related investments, lenders are not sure whom to trust with loans.

"Everyone has their own secrets, and no one wants to tell," Bethune said. "So who knows what's going on? That's part of the problem."

Uncertainty and fear can be poison for an economy.

"The difference between having a weak economy or a recession is fear," said Mark Zandi, an economist for Economy.com.

One of the greatest threats now, he said, is that businesses will lose faith that people will buy products, or see the threat of a credit crunch and stop hiring or lay off workers. "Then we will go into a recession," he said.

Watching for the signs can be a dizzying occupation for individual investors. But Zandi said investors who want to be early in spotting weaknesses that could disrupt their investments should keep an eye on two simple indicators:

- Confidence. Most indicators suggest that the economy is sound. But what can shake that, with so much uncertainty hanging over the future, is confidence, Zandi said. People and businesses lacking confidence about the economy, or their own financial condition, delay purchases. That can then become a weight on the economy.

Consequently, Zandi suggests investors monitor the National Federation of Independent Business survey of small-business economic trends at www.nfib.com/page/researchFoundation. Pay attention to the optimism index. It has been below 100 most of the year, which suggests subpar growth. The latest index, for July, was 97.6. "If it's below 90 in August and continues to stay down, business may be losing faith and will rein in their expansion plans and cut workers," Zandi said.

For consumer confidence, the most timely barometer comes from the ABC/Washington Post Consumer Confidence survey. The latest report reflected serious unease. The index dropped further than it has ever fallen: 9 points, to minus 20 from minus 11. The range is minus 100 to plus 100.

"If it falls by the same amount next month that's a problem," Zandi said. "Generally, if confidence falls two months in a row it means consumers will pull back."

- Jobless claims. These numbers, which are compiled by the Labor Department, show how many people have filed for unemployment benefits.

Although they fell last week claims have risen in recent weeks, which means people are losing jobs.

"These data should be watched closely," Merrill Lynch strategist Richard Bernstein said in a recent report. "A significant increase in jobless claims would surely signal that the front end of the U.S. economy (and the global economy, for that matter) are starting to weaken more than has been anticipated."

More than two-thirds of the economy depends on consumers to buy goods and services.

Zandi said to watch for initial claims over 350,000 for more than a couple of months. "That would mean that layoffs are rising and risks of recession are rising," he said. Last week claims fell 19,000, to 318,000, but the four-week moving average was 325,750.

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Gail MarksJarvis is a Your Money columnist. Contact her at gmarksjarvis@tribune.com. Hear her on WBBM-AM 780 at 6:21 p.m. and 10:21 p.m. Wednesdays and 11:21 a.m. and 11:21 p.m. Sundays.